Dechra Pharmaceuticals: Now A Pure Pharmaceutical Play
Edison | May 12, 2014 07:00AM ET
Dechra Pharmaceuticals (LONDON:DECP) is an international veterinary pharmaceutical company, with an attractive portfolio of specialised products that largely target the resilient companion animal segment. Medium- and longer-term growth will be driven by the new product pipeline and geographic expansion. While the market is dominated by the large companies, there are many local players, creating potential acquisition opportunities. We initiate coverage with a valuation of £697m (800p per share).
Following the divestment of the services business in 2013 for £87.5m, Dechra Pharmaceuticals is now purely an international veterinary drugs company. Through both acquisition and in-house development it has built a portfolio of products that predominantly target less competitive therapeutic segments. Geographic expansion is underway, with a growing direct presence in the major European markets as well as the US. Delivery of the development pipeline should fuel further organic growth.
h3 Companion animals is an attractive growth segment/h3The animal health market is attractive, particularly the companion animal segment. As dogs and cats increasingly become members of the modern family, people in both developed and emerging markets are purchasing a broader range of products to help their pets live longer and healthier lives. Companion animals forms the majority (52%) of Dechra Pharmaceuticals’ current and prospective revenues.
h3 Trading update highlights the opportunities/h3The nine-month statement showed Dechra Pharmaceuticals is growing faster than the markets in which it operates. In the near term, US revenue growth will be boosted by the return of the ophthalmic range and dermatology product Animax during 2014, while the set-up of a direct presence in Italy in March (Canada in autumn) will help sales and, importantly, profit. The strategic focus on well-defined products, both current and future, coupled with the planned geographic expansion, suggests solid sustainable organic earnings growth over the next five years.
h3 Valuation: DCF valuation of 800p per share/h3We value Dechra Pharmaceuticals at £697m (800p per share). It is currently trading at a slight premium to its peers based on various earnings multiples, but we believe it should be trading at a greater premium because of its development pipeline. New product launches, combined with geographic expansion, are expected to accelerate the sales growth rate in FY16 and drive a period of double-digit earnings growth.
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